Europeans keep truly staggering sums of money in banks. According to ECB data, households held approximately €7.6 trillion in bank deposit products as of July this year. What a sum!

Of that amount, nearly €5 trillion held by households were in overnight deposits - funds you can withdraw from the bank immediately, such as the money in your checking or savings account. Another €0.16 trillion held by households were in term deposits, where the funds are locked in for a specific period. The remaining €2.5 trillion were held in deposits redeemable by notice.

In the past, it was standard practice for banks to pay adequately for the money deposited with them. This is because they don't keep this money in a vault with your name on it. Instead, they use it to make more money, such as by lending it out at a higher interest rate or by investing it wisely. Essentially, the bank is borrowing money from you for its own use, and in return, it offers you some interest.

The problem is that we got used to zero interest rates, not expecting to earn anything on our bank deposits anymore. Take a moment to contemplate the interest rate you are currently getting on your savings account.

Data show that it most probably won’t be high. In July, the average interest rate on demand deposits (such as current and savings accounts) was just 0.38%. So, if you lend the bank €100, they'll give you an extra 38 cents a year later, and that's before the income tax is deducted.

In many cases, they also charge a fee for maintaining the account, which can wipe out the entire 38-cent earnings and even leave you in the red. Despite this, banks have nearly €5 trillion at their disposal under these terms.

Relying on deposits redeemable at notice is also one of the popular but very ineffective attempts to protect money. They work in a similar fashion to overnight deposits, with additional conditions or notices when withdrawing funds, which can range from a few days to several months. They offer slightly higher interest, currently at around 1.77% (still below inflation).

The situation is a bit better for term deposits, which have agreed maturity. The central bank's interest rate hikes (which you've probably heard about in the media, especially during times of inflation) and competition among banks have pushed the average interest rate up to 3.00% (based on data from the ECB.)

That means that for the €0.16 trillion in term deposit accounts (30-times less than the amount they get from overnight deposits at no charge), banks must pay a bit more. The question, however, is how much they can earn from this money.

High-Interest Goldmine

As was mentioned earlier, banks don't just keep your money hidden away in vaults; they actively put it to use. They aim to lend out most of the money they have through various financial products like mortgages, consumer loans, overdrafts, corporate loans and similar products. For these loans, they charge borrowers a certain amount of interest, which becomes a source of income for the bank.

If you have any loans, you're probably aware of how much interest rates on them have gone up recently. The average interest rate on existing mortgages to households is currently around 3.70%. For consumption loans, it climbed as high as 7.77%. This means that banks are earning significantly more from these loans than they are paying out on savings accounts or fixed deposits.

Of course, banks can't lend out all the money they have on hand. They keep a portion in reserve to cover withdrawals and other ongoing expenses. Interestingly, even these reserves can earn a decent interest rate nowadays with minimal risk.

Banks, for example, lend reserves to each other for one day through overnight deposits, with short-term rates. Currently, the largest banks in the eurozone are lending these funds at an average interest rate of 3.42%. That's quite a decent profit compared to the 0.38% paid on savings accounts.

Banks take your money, earn a relatively high interest rate (3.5-7.5%) on it, and pass only a small portion of your earnings (0-3%) back to you. The rest goes straight into their pockets. It is therefore no surprise that the operating incomes of European banks have risen sharply since interest rates started to rise. In 2023, it reached a record level of more than half a trillion euros.

Source: European Central Bank

Think Like a Bank

The good news is that you don't have to just stand by and watch as bank shareholders profit off your money. You can manage your savings just like banks manage their funds. Instead of letting your money sit idly in a vault (a savings account or a term deposit), consider making wise investments. By doing this, you keep more of the returns for yourself and your family, rather than letting the bank take a large cut.

You might have heard that you shouldn’t keep your savings in a bank account, as inflation (the rise in prices) gradually reduces their value. However, we often find that although people have heard about the importance of investing, they never got a proper explanation of how investing actually works. If this sounds familiar, this article is for you. It seeks to explain in simple terms what investing is and why it should be a part of everyone's financial strategy.

The next logical question is what to invest in. Just like with banks, the choice of investment will depend on whether you are depositing short-term reserves or money that you will only need several years down the line.

For short-term reserves, we recommend investing in money-market products. These are investments built on similar safe instruments to those used by banks for their short-term reserves. Finax's range of money-market products include the popular Smart Deposit (suitable for savings you'll need within 1 year) and the Intelligent Wallet (suitable for savings you'll need in 1-3 years).

For longer-term savings, you don't have to limit yourself to these instruments; you can invest in stocks and bonds. They have the potential for higher returns.

For example, equity investments have historically earned a return of around 8-9% per annum when held for the long term (and by long term, we mean a lifetime of investing, ideally 15, 20, or even 30 years). However, in exchange for this appreciation, you must be prepared to accept the ups and downs in the value of your portfolio.

You don't have to worry about choosing a portfolio composition (how much to put in stocks and how much in bonds) by yourself these days either. Our robo-advisor, for example, can help you with that. It is a simple questionnaire in which you fill in answers about your financial goals, your situation, the planned investment duration, or your general attitude towards risk. The Finax algorithm will then select a portfolio with a risk level that is appropriate for you.

Investing involves risk. Past returns are no guarantee of future returns, and an investment may result in a loss. Inform yourself about the risks involved in investing.

It is completely understandable if all of this sounds complicated to you, and you feel a bit lost. You might even be frustrated that the bank is making hefty profits off your savings, but investing simply seems too foreign and complex for you to dive into.

If that's the case, try learning more about investing and perhaps start with a small amount of money. At Finax, we publish educational content every week, aiming to explain topics like financial markets, investment risk, stocks, bonds, and personal finance in simple, relatable terms.

I bring to your attention some of our resources:

• Article on diversification
• Article on whether you can lose everything when investing
• Article on the causes of stock market growth
• Article on what to do when the markets drop

Don't feed the banks with your money, fill your own pockets instead. We would be honored if you decided to give investing a try with us.